Nicola Willis rules out scrapping Government’s KiwiSaver contribution, saying it’s an ‘affordable’ incentive

Finance Minister Nicola Willis says an almost $261-a-year Government contribution to eligible KiwiSaver members is affordable. Photo / Mark Mitchell

Finance Minister Nicola Willis has ruled out getting rid of the Government contribution to KiwiSaver in the future, despite officials advising her to scrap it.

“On balance our view was, having that contribution from the Government is a nudge to some people to save, who might not otherwise,” Willis said.

“It’s just another reason to be in the scheme, and at that level, it’s affordable for the future.”

From July, the Government’s KiwiSaver contribution will be halved to 25 cents for each dollar a member contributes, up to a maximum of $260.72 per year. Currently, the payment is capped at $521.43.

The Government will also stop contributing to KiwiSaver members who earn more than $180,000 a year.

While the reduced support might seem small on an annual basis, modelling done for the Herald by Simplicity’s chief economist Shamubeel Eaqub shows the extent to which it can compound over time.

Let’s take a 30-year-old earning $70,000 a year.

They would have $12,900 less by the time they’re 65 in real terms (or $26,300 less if the figure isn’t adjusted for inflation) due to the halved Government contribution.

This is based on the assumptions their salary rises with inflation but the Government contribution doesn’t, their investment delivers a return of 5% per annum after fees and taxes, and they contribute the default amount – 3% of their salary, rising to 3.5% and 4% by 2028.

For a 20-year-old earning $40,000 a year, the lost investment income would be even greater by retirement.

They would be $19,200 worse off in real terms, or $46,800 worse off without adjusting the figure for inflation.

A 40-year-old on a salary of $120,000 a year would have $8500 less by retirement in real terms and $13,900 in nominal terms.

As for a 50-year-old earning $200,000 a year, they would be $4800 worse off in real terms and $6400 worse off in nominal terms.

Officials estimate that halving the Government contribution will save the Government about $575 million a year.

Meanwhile, scrapping the payment for high-income earners will save $40m a year.

Inland Revenue and Treasury advised Willis to get rid of the payment altogether to maximise savings.

They believed this would improve value for money, noting there wasn’t evidence the Government contribution materially impacted people’s propensity to save.

The agencies also believed means-testing the Government contribution could add administrative complexity to the regime.

The current maximum Government contribution of $521.43 is half what it was before 2012, when it was cut by Finance Minister at the time, Bill English.

Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.